Copyright 2000 Federal News Service, Inc.
Federal News Service
September 28, 2000, Thursday
SECTION: PREPARED TESTIMONY
LENGTH: 4366 words
PREPARED TESTIMONY OF ANTHONY F. RAIMONDO THE NATIONAL ASSOCIATION OF
BEFORE THE HOUSE COMMITTEE ON
SMALL BUSINESS SUBCOMMITTEE ON GOVERNMENT PROGRAMS AND OVERSIGHT
SUBJECT - "THE FUTURE OF SMALL BUSINESS: WHAT LIES AHEAD? WHAT ISSUES NEED
TO BE ADDRESSED"
Chairman Bartlett, members
of the Subcommittee, my name is Tony Raimondo, president and CEO of Behlen Mfg.
Company, Columbus, Nebraska. I am here to testify on behalf of the National
Association of Manufacturers. The NAM - 18 million people who make things in
America is the nation's largest and oldest multi-industry trade association. The
NAM represents 14,000 member companies (including 10,000 small and mid-sized
manufacturers) and 350 member associations serving manufacturers and employees
in every industrial sector and all 50 states. We're headquartered in Washington,
D.C., and we have 10 additional offices across the country.
Specifically, I want to discuss the pro-growth and pro-worker issues
that would benefit America's small business community and overall economy.
America's economy has expanded impressively over the past 18 years, with only
one relatively mild downturn in the entire period. At the NAM, we are proud of
the disproportionately large contribution American manufacturers have made to
that expansion. Coupled with the fiscal restraint of recent years, our booming
economy has filled federal coffers beyond expectations and yielded the first
federal budget surplus in more than a generation. The NAM believes that the
federal tax code is the single largest current obstacle to economic growth.
Federal tax laws need to be reformed and replaced with a pro-growth code. We
realize that this effort is a daunting one. Consequently, until the code itself
is fundamentally changed, we believe that certain pro-growth incentives need to
be incorporated into an otherwise anti-growth tax code. For our small and
mid-sized members, two of the most important incentives are repeal of the
current estate and gift tax regime, sometimes known as the death tax, and a
reduction in tax rates for S-corporations.
Death Tax Repeal
importance of repealing the death tax to our small and mid-sized members is no
surprise since they spend, on average, a staggering $52,000 a
year on estate-tax planning. The time and money spent preparing for the death
tax simply do not help a business in any other way. This diversion of valuable
human and financial capital achieves absolutely no economically useful purpose.
It does not increase productivity, expand the workforce or put new products on
the shelf. A business pays this cost every year, not just at some uncertain
future date when an even bigger bill comes due.
Our members would much
prefer spending this money on new technology, business expansion and additional
employees. Moreover, for about two- thirds of these companies, if the present
owner died tomorrow, plans for expansion would be delayed, substantially
curtailed or abandoned. For nearly one-third of our members, heirs would have to
sell all or part of the business to pay the estate tax.
The death tax
can be devastating to the transition between generations in a family-owned
business. A Vermont Life insurance company study indicates that fewer than one
in three family-owned companies survives to the next generation. The 55-percent
estate tax rate does not allow much room to breathe. Very few businesses or
business owners have that kind of liquidity, and almost no manufacturer does.
Currently there are some special estate-tax breaks on the books for
small businesses, but qualifying for the family-owned business exclusion is
difficult, if not impossible. Business owners must constantly monitor whether
they meet the stringent ownership and participation requirements in the law,
often a time-consuming and expensive endeavor. If the government determines
after the fact, that is, after the owner's death, that these requirements have
not been met, the full estate tax bill is due. Complete repeal of the death tax
is the best solution for a pro-growth economy and for family-owned manufacturing
companies and other small businesses that are creating jobs and a securing
future for their employees.
S-Corporation Tax Rates
percent of our small and mid-sized members operate as S- corporations and
tax-rate relief for S-corps is another tax law change that would have a positive
impact on the ability of our small and mid- sized companies to grow. Congress
originally created S-corps to offer small business owners an efficient and
cost-effective way of doing business. Up until recently, lawmakers' efforts were
extremely successful. For almost 40 years, S-corps contributed significantly to
the country's economic growth. However, this positive trend was derailed in
1993, when the top individual tax rate was increased.
The 1993 Omnibus
Budget Reconciliation Act raised the highest marginal tax rate for individuals
from 31 percent to 39.6 percent - almost six percentage points higher than the
comparable C-corp rate, which remained at 34 percent. Consequently, S-corps - as
pass-through entities - now pay a higher tax rate than C-corps on income that is
reinvested in their businesses.
The tax law changes enacted in 1993
represents a stark departure from Congress' strong support for S-corps, since
they actually discourage small business owners from reinvesting earnings back
into their companies. Income earned by similar sized C-corps that is retained
and invested in the company is taxed at a maximum rate of 34 percent, while
income reinvested in an S-corp is taxed at a maximum rate of 39.6 percent. To
put it simply, S-corp owners now pay a higher tax than C-corps on money used to
develop new products, enter new markets and hire additional employees.
Reducing the tax rate on S-corps would restore the benefits of S-corps
and encourage entrepreneurs who are trying to grow their businesses.
Sales of Small Businesses: Restricting the Use of Seller Financing
Another tax-related issue that I wanted to bring to the attention of
this committee is a provision enacted in late 1999, which prohibits the use of
the installment method by accrual-basis taxpayers. This tax law change is having
a significant negative impact on sales of small enterprises. In some cases, the
sale prices of businesses have plummeted. Other sales have collapsed.
The installment method is used in approximately 9out of 10 small
business sales for a variety of reasons, including the ability to spread the
capital gains tax payment over the life of the sale. But the installment method
has benefits beyond those related to taxes.
For sellers, it enables them
to be more flexible in structuring the sale and to get a higher price for the
business. For buyers, it allows them to purchase a business for which bank
financing is unavailable. The installment method also ensures that the seller
will continue to have a financial interest in the ongoing success of the
business. For smaller enterprises that tend to have more of their total value
attributed to good will, this assurance is often necessary for the sale to
The NAM supports reinstatement of the installment sales rule.
H.R. 3081, which passed the House on March 9, 2000, would restore the ability of
small businesses to use this rule. The Senate in July 2000, voted twice on
amendments that would restore the installment sales provision, but these
amendments were stripped out of the underlying legislation before final passage.
We urge the Subcommittee to push for enactment of this provision in 2000.
Worker safety is one of the top concerns in my
factory - and for the members of the NAM. I know all of my workers personally.
They are like family to me and providing a safe work environment has been a team
effort for many years. That said, the overall injury and illness rate is
currently at its lowest level since the Bureau of Labor Statistics (BLS) began
reporting this information in the 1970s. In spite of BLS data showing that
musculoskeletal disorders, also known as MSDs, have declined by 24 percent since
1994, and despite the lack of consensus in the scientific and medical
communities on the causes of MSDs, OSHA is moving aggressively forward with an
ergonomics regulation and ignoring the intent of Congress.
covered by OSHA's proposed rule - which was published in the Federal Register on
Nov. 23, 1999 - would be responsible for taking measures to reduce all MSDs,
including carpal tunnel syndrome and neck and back strains, by initiating and
maintaining a basic ergonomics program once A SINGLE injury is reported in their
facility. OSHA considers an injury "work related" if working conditions
contributed to the injury, even if non-work factors contributed as well.
Further, where typical workers' compensation rules currently provide two-thirds
of an employee's pay while out of work, OSHA's rule will require workers to be
paid at 90 percent of their pay if claiming an ergonomic injury. OSHA has, in
effect, created a "most favored injury" status for ergonomics.
covered, employers must set up an ergonomics program to control "work-related"
MSDs that must include the following elements: (1) management leadership and
employee participation; (2) hazard identification and information; (3) job
hazard analysis and control; (4) training; (5) medical management; and (6)
program evaluation. In October 1998, Congress approved $890,000
for the National Academy of Sciences (NAS) to conduct an independent,
peer-reviewed analysis of the available science on MSDs. The NAM opposes the
rule and urges OSHA to wait until all the evidence is in before moving forward.
Health-care costs have jumped dramatically
in the past decade. However, recent attempts at controlling costs, like the
Dingell- Norwood Patients' Bill of Rights, will do nothing to
make health insurance more affordable and accessible to those without coverage.
Its mandates, bureaucratic involvement and lawsuit provisions will so raise
costs that more and more Americans will find health insurance beyond their
reach. By the Congressional Budget Office's own conservative estimates, the
Patients' Bill of Rights will raise premium costs by as much as
4.1 percent per person, per year, and will increase the number of uninsured by
nearly 2 million.
Worse, the bill's provision that allows employers to
be sued for health-plan decisions will cause many employers - who voluntarily
offer this important benefit - to drop insurance coverage for employees rather
than risk exposure to a business-killing lawsuit. This is bad news for small
businesses. Despite claims to the contrary, the Patients' Bill of
Rights allows any employer who exercises "discretionary authority" over
the company health plan to be sued. The truth is that basically all employers
exercise such authority in managing their health plans, thereby leaving
themselves open to potentially costly and draining litigation.
In an NAM
survey of 1,000 companies of all sizes, nearly 40 percent indicated that they
would drop health coverage for employees if exposed to lawsuits for health plan
decisions. An additional 58 percent noted that such provisions cause "great
concern." Nearly all expressed concern about health-care inflation, with
three-quarters predicting cost increases of 10 percent or more in the absence of
federal legislation. Yet, virtually all manufacturers currently provide health
care benefits to employees (more than any other sector, including the
government) and plan to continue doing so unless rising costs and the threat of
lawsuits force them to drop benefits. Many others will be forced to reduce
benefits or increase employee's share of coverage costs.
While it is
true that there are cases where the health-care system clearly fails, it is also
true that vast majority of Americans receive timely, high-quality health care
when they need it. Poll after poll shows that some 90 percent of Americans are
satisfied with their health-insurance plans and the government's own statistics
show that 97 percent of all health care claims are paid without incident. Why,
then, are we gripped by a "sky is falling" mentality towards health care
recently? We shouldn't pass laws based on the 3 percent of Americans who dispute
a health claim at the peril of the tens of millions of Americans who currently
enjoy health care coverage. So what should we do? First, we need to provide for
fair and timely independent review of disputed claims, expediting the process
where appropriate, so that conflicts can be resolved efficiently and with as
little delay as possible. The NAM has long believed that we should let market
forces, not government mandates, rectify any problem areas within the
Small manufacturers are also focused
on aggressively expanding our markets overseas. With final passage of Permanent
Normal Trade Relations (PNTR) with China, I wanted to highlight an important
part of the debate that generally has been overlooked: Trade is vitally
important to small American companies. Smaller companies will benefit from
increased trade with China just as much as their larger counterparts. In fact,
the U.S. Commerce Department has found that a startling 82 percent of all firms
exporting to China are smaller companies, accounting for 35 percent of the
dollar value of all U.S. exports to China.
Our experience at the NAM is
that small and mid-sized exporting companies are aggressive in increasing their
sales abroad. In 1989, roughly half of the NAM's small and mid-sized member
companies said they export. Today, 80 percent fall into that category. In 1989,
only 4 percent of those members earned more than 25 percent of their revenue
from exporting and another 4 percent earned between 11 percent and 25 percent.
Today, those percentages have more than doubled to 9 percent and 11 percent,
On the investment front, 13.8 percent of NAM's small and
mid-sized member companies have a plant or other investment (acquisition, equity
interest or joint venture) outside the United States. In 1995, only 9.2 percent
had an overseas investment. That represents a 50 percent increase in just five
What has this dramatic trade and investment expansion meant to
our economy? By any measure, the American economy and American workers have
thrived in the past decade, due in no small part to trade.
* More than
12 million American workers' jobs are linked to trade. Unemployment has fallen
to below 4 percent, its lowest level in over 30 years.
* Millions more
work for companies that aren't directly involved in trade but for supply
companies that are.
* 25 percent of the more than 12 million new jobs
added in the U.S. economy during the 1990s has come from exports.
Companies that do export create jobs almost 20 percent faster than non-exporting
companies; they pay, on average, 15 percent more, provide benefits 40 percent
higher and are 10 percent less likely to go out of business. * Over the past
decade, exports have contributed 25 percent of America's overall economic
* U.S. share of world exports has increased by 20 percent in the
past 10 years. Trade -- exports and imports -- now represents about 25 percent
of U.S. GDP. America is the world's largest exporter.
The fact is the
health and wealth of small manufacturers and the well- being of the American
worker are directly tied to the world economy. Ninety-six percent of the world's
population live outside the United States. We can't afford to shut ourselves out
of the world marketplace. To continue growth and prosperity, we must sell to the
world, as well as to ourselves.
So how can we expand trade opportunities
for small manufacturers? Significant foreign barriers to free and open commerce
still remain in the world, particularly outside the industrial countries. The
NAM believes the elimination of these impediments worldwide should be a top
trade priority both for the White House and Capitol Hill. Manufactured goods
comprise 90 percent of U.S. merchandise exports, and emphasis should be placed
on removing barriers facing manufactured goods trade. The NAM urges an ambitious
agenda of multilateral, regional, bilateral and sectoral approaches with the
intention of obtaining as much new market access as possible.
One regulation currently being promulgated gravely concerns
manufacturers of all sizes, and that is the hours-of-service rule that the
Department of Transportation published on May 2, 2000. For example, the proposal
would place restrictions on the ability of drivers to operate commercial
vehicles between midnight and 6:00 a.m. If finalized, this rule would severely
disrupt just-in-time operations, particularly for those factories that operate
24 hours a day. The proposed final rule is deficient in its analysis of trade-
offs, or so-called substitution risks.
For example, it does not take
into account that there already is a shortage of qualified truck drivers. Are
deliveries to be scaled back if they were to occur before 6:00 a.m., or will
less-qualified drivers be hired? If it is the latter, then the DOT should have
considered the well-known fact that most accidents involving trucks occur with
less- experienced drivers - yet it failed to do so. Another trade-off not
considered by the DOT is clean-air attainment. If replacement drivers cannot be
found for pre-6:00 a.m. shipments, then those trucks would be forced into
congested rush hours. In addition to the safety implications, what is the effect
on clean air goals of trucks belching exhaust while idling in stalled traffic?
This rule is a prime example of where Rep. Sue Kelly's proposal to authorize the
General Accounting Office to scrutinize the promulgation of rules early in the
process would be helpful. While I am not a regulatory expert, I understand that
many people who are have expressed the opinion that this rule never should have
been returned for publication from the Office of Management and Budget. Legal
Small businesses - and small manufacturers in particular - have
been very disappointed that legal reform measures have not been enacted into
law. We appreciate, however, that the House has forwarded to the Senate H.R.
1875, the Interstate Class Action Jurisdiction Act; H.R. 2005, the Workplace
Goods Job Growth and Competitiveness Act; and H.R. 2366, the Small Business
Liability Reform Act. H.R. 1875 would allow nationwide class-action lawsuits to
be removed to federal court where there is diversity of citizenship between the
parties; H.R. 2005 would establish an 18-year statute of repose for workplace,
capital goods; and H.R. 366 would establish a national standard of clear and
convincing evidence before punitive damages could be awarded against firms with
fewer than 25 full-time employees, and caps these damages at the lesser of three
times compensatory damages or $250,000. H.R. 2366 also protects
product sellers and renters from liability simply for being in the chain of
distribution or for owning the product. In the current tort system, smaller
businesses face the potential of bankruptcy with even one frivolous lawsuit that
receives a favorable jury award. These measures would help to level the playing
As with legal reform, smaller
businesses have been frustrated with Congress inability to pass any regulatory
improvement measures. Again, as with legal reform, the NAM recognizes that the
House has done its part by sending to the Senate H.R. 350, the Mandates
Information Act of 1999; H.R. 391, the Small Business Paperwork Reduction Act
Amendment of 1999; and H.R. 1074, the Regulatory Right- to-Know Act. H.R. 350
would allow a point of order against an unfunded mandate of
$100 million or more on the private sector; H.R. 391 would
allow a waiver for most first-time, technical paperwork violations that cause no
harm; and H.R. 1074 would require the Office of Management and Budget to provide
a yearly accounting of the costs and benefits of federal regulatory programs.
Small manufacturers also want to thank Rep. Sue Kelly for her hard work
in support of H.R. 4924, the Truth in Regulating Act, which would establish an
office within the General Accounting Office to promote better congressional
oversight and accountability in the promulgation of regulations. As note above,
it would have been helpful to have this office to analyze the proposed DOT
hours-of-service rulemaking. (GAO has issued a limited report, but it could have
been even more effective had the provisions of H.R. 4924 been in effect.) The
NAM - and particularly its small manufacturers - hopes that any or all of these
measures will be forwarded to the President, since the burden of regulatory
compliance falls disproportionately on smaller businesses.
Coming Through the Backdoor
Small manufacturers care about the
environment. We live, work and are raising our children in the same community.
Clear air and water are fundamental to the people of Columbus, Nebraska, and to
our employees. So is fair and open government. However, according to an Aug. 25,
2000, Washington Post article, "the Clinton Administration is working feverishly
to issue a host of new regulations supported by environmentalists and other
liberal-leaning groups but opposed by many business and industry organizations."
The article cites the White House's determination to circumvent the rulemaking
and legislative approval processes in order to accomplish its regulatory goals.
Especially enthusiastic is the Environmental Protection Agency (EPA), with a
reported 67 regulatory actions expected before this Administrations January
exit. The NAM is seeking this list from EPA through a Freedom of Information Act
(FOIA) request submitted on August 28, 2000.
This list manifests the
combined effects of two serious problems of Administrative excess: 1) the now
routine (and bipartisan) "midnight" rulemaking rush as a President's term draws
to a close; and 2) the Administration's increasingly serious efforts to
promulgate rules without using the notice-and-comment protections required under
the Administrative Procedures Act (APA). The negative synergy of these two
trends disrupts the regulatory process and creates uncertainty within the
The EPA's "backdoor rulemaking," or the practice
of pushing through policy objectives under the guise of guidances and
interpretations without proper administrative procedures, has become commonplace
during the past year. It is faster (no proposals or notices) and easier (no
comments to address or analyses required by law or executive order such as small
business impact, cost/benefit analysis or unfunded mandate impacts). For
example, in December 1999, the EPA published an interim guidance on air
emissions under the CERCLA, which purported to interpret a liability provision
without express or implied authority from Congress. The EPA followed a flawed
process, clearly in violation of the APA, by issuing the guidance without
responding to industry comments in related rulemakings.
involves the EPA's controversial new source review (NSR) program, which requires
major stationary sources to undergo review for environmental controls if the
source builds new plants or makes "non-routine" changes to existing operations
resulting in significant increases in emissions. Previously, the EPA
unilaterally changed the definition of "routine maintenance and repairs" under
the long-standing NSR regulation, without a rulemaking or guidance, through an
"enforcement alert" on its Web site. Now, the EPA may be rushing to promulgate
an unsound NSR rule by the end of this year. In a related area, the EPA's plan
to change a New Source Performance Standard (NSPS) regulatory definition through
"binding" interpretation was met with resistance by several industry
associations, including the NAM.
The next few months promise to be busy,
as the EPA gears up for its last push to regulate, guide and enforce. Michael
Baroody, NAM's senior vice president, policy, communications and public affairs,
summed it up best in his February 2000 testimony before the House Subcommittee
on National Economic Growth, Natural Resources and Regulatory Affairs. "One has
the sense that the Administration, perhaps having gotten in its final year an
intimation of its own mortality, is in a bit of a rush to make policy by
Administrative fiat where it has failed to do so by legislative means or by
following the regular regulatory order." The NAM will strive in Congress, in the
courts and with the next Administration to protect economic growth and
manufacturers' competitiveness from EPA's zealous - and often illegal -
policy-making through the backdoor.
Energy Supply Concerns
manufacturers are also deeply concerned about the recent media coverage
concerning the spike in energy prices. On August 17, NAM released its "Statement
of Concern on Energy Supply Policies." The statement focused on the need for the
federal government to pay more attention to crafting policies that would
encourage - rather than discourage - adequate energy supplies at competitive
prices over the long term. The statement, which was reported in several trade
publications, developed as a result of a number of NAM member companies making
the NAM staff aware of their concerns and experiences with spikes in prices of
natural gas, electricity and petroleum over the past year.
The NAM will
work actively with this Administration and Congress in the time remaining, and
with the presidential and congressional candidates to urge them to attend to the
seriousness of these problems and the need for prompt action to meet these
I would like to thank Chairman Bartlett and
the Subcommittee for the opportunity to discuss issues concerning small business
on behalf of the National Association of Manufacturers. We hope that our
recommendations to best promote and sustain an enterprise-friendly economy for
small manufacturers are helpful and we look forward to working with the Congress
on these various issues. Our list of concerns is lengthy, but we are up to the
task to work with Congress and the Administration to encourage economic growth
for our nation's small businesses - particularly in the manufacturing sector.
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